The coming year could see a cooling-off of the stock market from the scorching growth of the past two years, especially for tech stocks, and very modest rate cuts by the Federal Reserve, Wharton emeritus professor of finance Jeremy Siegel said in December on the Wharton Business Daily radio show on SiriusXM. (Listen to the podcast.)
And while businesses are optimistic about deregulation in President-elect Donald Trump’s second term, top concerns in 2025 include how his policies on immigration and tariffs could play out, he added.
Following are key takeaways from the interview:
Stock Market Could Cool Off, Especially Tech
Siegel said he expected the stock market to be less upbeat in the coming year. “We’ve had two really fantastic stock market years. They exceeded my expectation this year with another 20% plus gain on top of what we had in 2023,” he said. “I expect it to be more muted [in 2025]. I see [growth in] equities being zero to 10%,” and a correction — a 10% drop — is certainly a possibility, he added.
In particular, Siegel saw the possibility of “some cool off” with tech stocks. He noted that even as AI is trending strong, “there seems to be possibilities of more competition and some slowdown in that area” in 2025, he said.
Disappointments on AI could be the top dampener for tech stocks, Siegel said. Specifically, the top worries would be around the speed at which AI adoption occurs, and potential competition for market leader Nvidia and its Blackwell chips, and pushback from China, he added. China recently launched a probe into Nvidia, suspecting violations of its anti-monopoly law. “All this is on top of the big uncertainties of President-elect Trump’s tariffs and immigration policy.”
A Slowing Down, Not a Correction
Siegel said his median forecast for the stock market is a bit of a slowdown from the pace of the past two years, and not really a bear market. The “standard error” in estimating stock market returns is 20%, which means that in any given year, it could be up 20%, or zero, up 10%, down 10%, or even more extreme than that,” he said. But at the same time, “it is so hard to predict on a one-year [basis],” he added. He noted that although “valuations … for the entire market [are] on the high side, I don’t think they’re crazy.”
“Tech firms, [led by the so-called] Mag Seven, have brought home the bacon,” he said. “They produced earnings growth of 25% to 30%. But they’re one-third of the market. I could see them cooling in 2025, to maybe being flat on the whole.” The Magnificent Seven stocks are Nvidia, Alphabet, Tesla, Microsoft, Amazon, Meta, and Apple.
If the Magnificent Seven give up some space, “that would give the other 493 stocks [in the S&P 500] a chance to shine, selling at a much more reasonable price earnings ratio of 18 to 20,” Siegel continued. The S&P 500 as a whole is priced at 22 times earnings, which is within the range of equilibrium of around 20, he pointed out.
Very Few Rate Cuts in 2025 — 50 Basis Points Likely
The Federal Reserve on December 18 lowered its funds rate by 25 basis points to a range of 4.25%-4.5%, noting positive signs on inflation and unemployment. (Note: This interview with Professor Siegel was conducted before the latest Fed meeting.)
“Tech firms, [led by the] Mag Seven, have brought home the bacon…. I could see them cooling in 2025, to maybe being flat on the whole.” — Jeremy Siegel
Anticipating that reduction at the Fed’s December meeting, Siegel said that he did not expect another rate cut in January. “My feeling is maybe only a 50 basis points cut next year.” That would put the Fed funds rate at between 3.5%-3.75%, which is “far higher” than the Fed’s own long-term estimate, and higher than its estimate at the September meeting, he added.
According to Siegel, the “r star,” or natural rate of interest under 2% inflation is probably between 3.5% and 4%, after taking into account the stimulus to the economy, the deficits, and the uncertainties that loom. The Fed defined the r-star as the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable.
Approaching normalization of the interest rate structure would make room for a “recalibration” of the long-term interest rates, which in non-recessionary times is between 100 and 150 basis points higher than short-term interest rates, Siegel noted. “So, if you can get the Fed funds rate down to 3.5%, we’ll see the 10-year at 4.5% to 5%, or potentially even a little higher.” The 10-year Treasury rate was trending around 4.5% in the third week of December.
Sentiments Are Up for Trump 2.0
Small, independent and medium-sized businesses are optimistic about deregulation in Trump’s second term, Siegel said. He pointed to improved sentiment in the latest Small Business Optimism Index put out by the National Federation of Independent Businesses; this sentiment indicator showed its highest reading since June 2021.
Recollections of deregulation during Trump’s first term played a role in that sentiment boost, Siegel noted. “People are saying, ‘Hey, you know what? Things were pretty good for those smaller businesses during Trump’s first term.’ And they’re hoping for a repeat in 2025 and 2026.”
Tariffs as a Negotiating Tool
Trump’s threat to impose higher tariffs on imports from Canada, China, and Mexico is one of the biggest uncertainties for U.S. businesses. Trump will start using the threat of tariffs “as a negotiating tool,” Siegel said. “He loves to come in with a very strong position and negotiate down from there,” he said. At the same time, the president-elect has to be aware of the potential consequences of that approach on inflation and on businesses, he cautioned. He listed Trump’s positions on tariffs and immigration as the “two big uncertainties” for the economy.
“It would be surprising to me if [Trump] pursued policies that were highly detrimental to the economy, because that would be reflected right away in the stock market.” — Jeremy Siegel
That said, Trump is unlikely to act in ways that would purposely hurt stock market sentiment, Siegel suggested. “He is the most outspokenly pro-stock market President we have ever had,” and one who measures his success as a president on how well the stock market does, he added. “It would be surprising to me if he pursued policies that were highly detrimental to the economy, because that would be reflected right away in the stock market.”
Geopolitical Concerns
Geopolitical concerns weigh heavily on the outlook for 2025, ranging from the conflicts in Ukraine and the Middle East, and around China on multiple fronts. Trump could help ease some of those pressures with his promises of entering into negotiations on Ukraine and the Gaza Strip immediately after taking office, Siegel said.
“With what has happened in Syria, it might make the time right for a deal on both those fronts,” he added. “That would take out a lot of uncertainty. It’s far from a done deal, and things could spiral out of control. The markets, by continuing to be strong, are actually hoping for settlements in those two troubled areas.”
On the ongoing threat potential of China acting against Taiwan, Trump might try to get together with Xi Jinping, “but that is also very, very uncertain,” Siegel said. “Fortunately, we don’t have a shooting war in Asia yet.”
Cybersecurity Worries in 2025
One of the top worries in 2025 will be around cybersecurity, especially from state-sponsored bad actors, Siegel said. “I wouldn’t like to wake up in the morning and try to get access to my bank accounts and brokerage accounts and find they’re all locked out.” That worry is “a nationwide phenomenon that could throw the world into chaos,” he added.
According to Siegel, the government ought “to consider cybersecurity as important as our military preparedness and spend a lot of resources to make sure that’s there.” Securing the electricity grids is another priority, he said, noting that the emerging AI sector has high power requirements. “Those are two areas where we certainly need to spend resources if we are to realize the potential gains from artificial intelligence.”
